SBUX - Luckin Coffee: Q4 2022 New Store Opening Updates

Summary

• The stock of Luckin Coffee went up 125% in 2022, handily beating both the major indices and its peer companies in the US and China.
• Based on the data of its WeChat channel, the total store count of Luckin Coffee reached approximately 8,360 at the year end 2022.
• Luckin Coffee on average opened 6.4 new stores per day during 2022. The pace of new store opening slowed down during 4Q22, but bounced back sharply during January 2023.
• Our investment thesis remains unchanged that a relisting onto the main exchange is imminent and will eventually unlock significant upside of the stock.

Stock Up 125% during 2022

Despite negative COVID impact and broad market selloff, Luckin Coffee Inc. (LKNCY) finished 2022 with a high note. Its stock went up 125%, outperforming both the market indices and its industry peers by a large margin. The chart below compares LKNCY stock with S&P Index ( SPY ), Global X MSCI China Consumer Discretionary ETF ( CHIQ ), Starbucks Corp ( SBUX ) and Yum China Holdings ( YUMC ) for 2022.

LKNCY vs SPY, CHIQ, SBUX and YUMC

Our investment thesis remains unchanged that LKNCY stock price could have 3x to 5x upside from its level in April 2022 and an imminent relisting onto the main exchange will be the key catalyst to unlock the move. Based on the information in its 3Q22 earnings release, we will not be surprised if the relisting happens in 3Q23.

Total Store Count Reached 8,360 by the End of 2022

Based on the weekly updates from its official WeChat channel, we estimated that LKNCY finished 2022 with a total of 8,360 stores across China, up 39% from 2021 (see charts below). With that store count, LKNCY is solidly the largest coffee chain in China, expanding the lead over Starbucks, the second largest coffee chain in China, by over 2000 stores. We expect this lead on store count to continue as Starbucks had "only" 6,000 stores in China as of September 30, 2022 and planned to open up to 9,000 stores by 2025 . LKNCY should have at least 9,000 stores by the end of 1Q23 at the current pace of new store openings.

Luckin Coffee Monthly New Store Openings

Luckin Coffee Quarter End Store Count Since 1Q20

The new store openings are primarily driven by LKNCY's partnership stores (i.e. franchised stores). Over the past two and half years, the share of the partnership stores continued to increase in the store mix and reached 32% in 3Q2022 based on the company's earnings release dated November 22, 2022 (see chart below).

Partnership Stores as % of Total Stores

P ace of New Store Openings Slowed Down in 4Q22, but Bounced Back to Historic High in January 2023

The average new store openings per day is the key metrics to estimate and assess LKNCY's pace of opening new stores. As illustrated in the chart below, the pace of new store opening during fourth quarter 2022 had slowed down to 5 new stores per day from 7 new stores per day in the second and third quarter 2022 (see chart below). This pace is also lower than full year average of 6.4 new stores per day in 2022.

Average New Store Openings per Day 4Q22

It is highly likely that the slowdown was caused by the dramatic and somewhat chaotic development of COVID situation across China during the last three months of 2022. After National Day holidays in the first week of October, China saw a spike of COVID cases across the country, especially in some big cities that used to have COVID well under control, such as Guangzhou. As part of the zero COVID policy, local governments quickly enforced partial or full lockdowns in both October and November, including closing down the commercial venues. Millions of people experienced the most widespread and lengthy disruptions of both daily life and work since 2020 when COVID first erupted. This understandably had adversely impacted on the retailers and restaurants such as LKNCY.

At the end of November, China made a U turn on its draconian zero COVID policy and abruptly removed all the COVID restrictions, which in theory should be a very positive development. However, the subsequent massive infections and the overstretched healthcare system had kept a lot of people from going out due to either infection or fear of being infected (see chart below). Thus, the pace of new store openings by LKNCY did not really recover in December despite the end of zero COVID policy in China.

Infected COVID Cases in China

However, the new data released during January 2023 suggested that the slowdown in 4Q22 was likely just temporary as the new store opening in January 2023 not only bounced back, but also reached historical high of an average of 12 new stores per day (see chart below), almost double the average of 6.4 per day in 2022.

Average New Store Openings per Day Jan 2023

The weekly and monthly new store openings data shows the similar pattern in 4Q22 and January 2023 (see two charts below). The acceleration in January 2023 could be partially attributed to the pent-up new openings delayed due to COVID from 4Q22. It remains to be seen whether the pace of new store opening would remain at the elevated level for the rest of 2023.

Weekly New Store Openings

Monthly New Store Openings

New Store Openings on the Map

We updated the new store opening map with the latest date of 4Q22 and January 2023. Similar to what we did in 3Q22 updates, we continued to label the provincial level new opening count in orange color if the number is at or above 50. We then placed the four quarterly maps in the chronological order (see below) to show the store expansion throughout 2022.

Our observations are as follows:

1) The provinces with the orange numbers had grown very fast from merely 3 in 1Q2022 to 19 in January 2023. It is worth mentioning that China has 31 provinces and direct municipalities (excluding Hong Kong, Macau and Taiwan) and LKNCY has penetrated 61% of them with at least 50 new stores;

2) New store openings in 12 provinces had surpassed 100 stores with 3 of them over 200 new stores; and

3) The growth during 4Q2022 and January 2023 continued to be more on density (more new stores in a given province) than geographic expansion (more provinces with orange numbers). It is worth noting that LKNCY has opened its stores in almost all mainland provinces except Tibet and Xinjiang, so the density focused growth strategy definitely makes sense.

Relisting Could be Near

During the earnings call on November 22, 2022 , the company provided an update on the outstanding lawsuits related to the accounting fabrications back in early 2020.

Firstly, on October 7, 2022, the New York State Core preliminary approved a $7 million settlement with a class of investors who purchased our January 2020 convertible bonds, but were not included as creditors in our Cayman scheme. The settlement is still contingent upon final approval of the court and we expect the court to hold a hearing on final approval in Q1 2023.

Secondly, there were three securities lawsuits filed by investors in our ADS, who opted out of the Federal Class settlement. We have reached agreements to resolve all three actions. One of the actions has already been dismissed, pursuant to the terms of the settlement and we expect the other two to be dismissed on the company's satisfaction of the terms of those settlements, which should occur in Q4, 2022 and Q1 2023.

Finally, we currently expect that all lawsuits filed due to our historical accounting issues will be dismissed by the end of Q1 2023.

With all these legacy lawsuits to be dismissed by 1Q23 plus the solid and improving fundamentals, LKNCY should be in a very good position to achieve its relisting on one of the main exchanges. Also the timing could not be better as the major overhangs of COVID restrictions in China and potential delisting of Chinese ADRs had effectively been removed. We will not be surprised at all to LKNCY being relisted during 3Q23, if not earlier.

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